Answer to Question #59852 in Other Economics for marco

2016-05-13T09:03:18-0400

Question #59852

SDRs (IMF Special Drawing Rights) , Explain what their function is and why they were introduced. Analyse the strengths and the weaknesses of the argument that SDRs could be used as a world reserve currency in place of the US $.

QUESTION 2There is talk of a possible IMF intervention in Nigeria. When does the IMF intervene in a country? Why is Nigeria in this situation today? Considering previous interventions, such as Greece, what measures would the IMF probably ask Nigeria to take? What impact would these measures have on the Nigerian economy? Would you recommend they ask for IMF support? Why/Why not?

Expert's answer

2016-05-16T10:54:03-0400

The SDR is an international reserve asset, created by the IMF in 1969 to supplement its member countries’ official reserves. SDRs can be exchanged for freely usable currencies. The value of the SDR is currently based on a basket of four major currencies: the U.S. dollar, euro, the Japanese yen, and pound sterling. The basket will be expanded to include the Chinese renminbi (RMB) as the fifth currency, effective October 1, 2016.SDRs used as a world currency in place of US $ can potentially be a more stable currency, the rate of which is not dependant on the economic situation in one country or region. However, тo politician wants to grant supra-national status to the IMF in money creation. That is why, it is unlikely to replace US $ in the global scale.

The IMF gives loans to the country when this country appears to be in crisis and asks for the financial support.However, IMF gives these loans on the condition of introduction of sectoral reforms, which will help the country to revolve from the economic decline. Considering the practice of Greece, IMF typically asks for the reforms, which normalize the equilibrium of national budget: decreases social pay-offs and increases taxes. Due to this, the gaps in the budget become minimized and the GDP increases gradually. A lot of countries were able to revolve due to IMF low-interest loans (for example, Ukraine). This proves an effectiveness of these actions.